The Third Circuit Court of Appeals recently held in Sable v. Velez (U.S. Ct. App., 3rd Cir., No. 10-4647, July 12, 2011), July 12, 2011) that New Jersey's Department of Human Services may properly consider a promissory note purchased as part of a crisis Medicaid planning strategy as a "trust like" device and therefore count the notes as "available resources" subject to a Medicaid spend down.
What is troubling in this case is that the notes in question appear to have been "DRA compliant." That is, the notes (1) provided for payment in equal installments, (2) were payable within the lender's life expectancy and (3) could not be canceled upon the lender's death. Notwithstanding such compliance, the court held that New Jersey DHS could properly determine that the Notes did not evidence "true" loans, since the transactions were not secured by any collateral from the borrowers had failed to meet their burden of showing that the notes were not the product of a "bad-faith arrangement." Since the Court ruled that the plaintiffs had failed to meet that burden, DHS was permitted to determine that the instruments were essentially "trust like" devices, and thus subject to the Medicaid trust-transfer rules that impose a five-year look back period.
While the Sable decision is not binding precedent in New York, we may expect that the various New York County Departments of Social Services may attempt similar attacks on the customary gift/loan strategy presently used for crisis Medicaid planning. To rebuff such attacks, practitioners may need to begin engaging in credit checks of our children/borrowers, and going a step further, requiring the children to offer collateral as security for the loans.